As the UK moves closer towards its deadline of becoming net carbon zero by 2050, it is not just the physical assets in our towns and cities that need to become greener. One powerful way to embed sustainability principles – and actions – within business is to link it to the very thing that drives every firm: finance.
Over the past few years there has been a notable rise in UK real estate firms committing to some form of green finance, from green loans to ESG-linked revolving credit facilities and sustainability-linked bonds.
Most recently, Hammerson inked what is thought to be one of the largest sustainability-linked corporate debt facilities in the real estate sector – a €700m (£605m) bond.
Louise Ellison, outgoing group head of sustainability at Hammerson, says the bond enabled the REIT to replace “normal” finance with debt that not only ensured that it kept its sustainability drive at the centre of the business but with debt that was more attractive to investors and providers.
“The bond market obviously gives you access as a business to large sums of capital at relatively cheap rates,” says Ellison. “We were refinancing and if you’re doing that, what you want to do is make sure that you have as much demand for the bonds as possible. With the increase in interest from investors in sustainability issues generally, and particularly in sustainable finance, having sustainability credentials alongside the bonds made perfect sense.
“Put simply, it means that we expected to get more interest in the bond. And the more interest in the bond, the better ultimately the cost of finance is going to be, so there were good reasons to do it.”
For Hammerson too, the fact the debt did not have to be linked to specific projects meant it could have a wider impact across the business.
“It meant we were much more flexible in what we could spend it on,” says Ellison, ”and at the same time completely drive the business to deliver on its sustainability targets.”
The new normal
Richard Wilson, vice president of debt & capital structure advisory at Lazard, who advised Hammerson on the financing, says this type of debt funding will soon become the norm across business.
He says this sector of financing has grown dramatically in scale over recent months in the UK and is becoming an increasingly popular instrument for businesses to create financial incentives to deliver on sustainability goals.
“The consistent message that we are hearing from the CFOs of large UK real estate companies is that they want all future debt raises to be aligned with their sustainability goals,” says Wilson. “We all know how important sustainability is for stakeholders of not just real estate companies, but the corporate world at large. And this attitude is very much in line with what we’re seeing in the wider debt capital markets, not just in real estate. It is my personal expectation that the question will shift to ‘why not sustainable finance’ rather than ‘why sustainable finance’ because the benefits are so compelling.”
Those benefits of course include the cost of the debt, which typically becomes cheaper the better businesses do at meeting their sustainability credentials, but also extend to staff motivation and, of course, actually helping the planet.
“It’s really motivating for employees of companies working in sustainability teams, because their work and their goals and achievements have direct financial incentives,” says Wilson. “Corporates and companies across the size scale should be considering whether this is something for them and whether they can raise debt that is aligned to their sustainability strategy because it’s a really powerful tool and message to all of your stakeholders.”
Ellison hopes that Hammerson’s recent execution of its sustainability-linked bond will serve as an inspiration to other businesses to do the same.
“I would certainly hope that we’ve made it clear that this is perfectly possible to do,” she says. “It’s a driver for having a very clear, strong, sustainable strategy and targets for reporting very clearly against them.”
She adds: “It all drives us to be better able to demonstrate what we’re doing as a business, which means that we will be more focused on making sure that our environmental impacts are positive and that we’re reducing our impact on the climate, which is where we absolutely have to go.”
Community support
For both Ellison and Wilson, the support of the finance community is essential in this drive.
“I’m very passionate that everybody needs to be pulling in this direction and being able to take to get the power of the finance community and investment community behind that is absolutely critical,” says Ellison.
“I think we’re really at an inflexion point in terms of the impact of finance on sustainability,” adds Wilson. “Globally the capital is moving towards sustainable projects and there’s a real focus on it and the finance community is very motivated to make it work and then to deliver on an impact.”
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